REUTERS

By Sujata Rao
LONDON (Reuters) – British investors have raised their holdings of European equities to the highest since September 2015 in a bet that a surging euro will not derail the bloc’s economic recovery and super-easy credit policies will remain in place.
Reuters’ monthly poll of 15 UK-based money managers found that overall, investors remained bullish on equities in July, raising allocations to 48 percent of global portfolios, up almost two percentage points from June.
They favoured the euro zone, pushing up allocations by 0.7 percent to 18.3 percent – five percentage points above end-2016 levels – while also slightly lifting the share of British and emerging equities. U.S. stock allocations slipped to 30.6 percent, the second lowest level since last August.
The poll was conducted between July 17-25, a period when data indicated a robust economic recovery in Europe and the International Monetary Fund forecast the bloc’s 2017 growth rate would accelerate to 1.9 percent.
“We’re overweight European equities and the euro,” said Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM).
“We expect European growth to remain relatively good for the next few months and political risk has dropped. This should translate either into euro strength or outperformance in European equities.”
The euro has jumped 12 percent versus the dollar this year <EUR=>, eroding some equity gains. European stocks have rallied 5 percent year-to-date but fell in June and are set to finish July flat <.STOXX>
The euro is clinging to highs even though the European Central Bank did not change its easy-credit policies at its July meeting, and failed to even discuss unwinding stimulus.
The U.S. Federal Reserve on the other hand is seen pressing on this year with cutting its $4.5 trillion balance sheet. U.S. interest rates have risen one percentage point since 2015.
UK investors raised euro zone bonds in portfolios to an average 23.3 percent, a four-month high, while U.S. bonds stand at 30.4 percent, the highest since August.
Asked if the four big central banks – the Fed, ECB, Bank of Japan and the Bank of England – were all likely to be in policy-tightening mode by end-2018, 90 percent of those who responded said no.
Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, noted that markets were less optimistic than central banks on the prospect of inflation rising in coming months towards target levels.
“Over the last decade, on this point, markets have been right much more often than policymakers. Unless inflation is entrenched and sustainable, tighter policy cannot be forthcoming,” Choukeir said.
“Therefore, we expect a number of central banks to still keep rates at rock-bottom levels throughout next year, with at least the BoE and the ECB to continue some manner of (quantitative easing).”
This is especially so in Britain, which will be preparing to exit the European Union, noted Sacha Chorley, a portfolio manager at Old Mutual Global Investors.
Despite political risks such as Brexit and U.S. President Donald Trump being dogged by scandals involving his associates’ alleged links to Russia, the VIX index <.VIX> – considered the best barometer of investor’s risk aversion – is bumping along at record lows.
It hit yet another trough after this month’s Fed meeting.
Just over half the poll participants who answered a question on the subject reckoned volatility was too low, putting it at risk of an upward surge. Some, including Ryan Boothroyd at Janus Henderson Investors, disagreed.
Boothroyd was that while markets indicated rock-bottom volatility levels, realised vol – a measure of what has actually happened – was also low.
“The spread between implied and realised is within historical norms for most markets. As a result, we believe that the current levels of implied volatility can persist,” he said.
All poll participants who answered a question on Trump predicted he would serve out his full four-year term.

(Reporting by Sujata Rao and Claire Milhench; editing by John Stonestreet)

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